How does my student loan actually work?
The UK student loan is one of the most misunderstood financial products in the country, including by many of the people repaying it. It is not a normal loan and treating it like one will cost you money or peace of mind, usually both.
A UK student loan (Plan 2 or Plan 5, most likely for anyone reading this) is better thought of as a graduate tax than a loan. You repay it as a percentage of what you earn above a threshold. If you never earn above the threshold, you never repay. After a set number of years the balance is written off regardless of what is left.
That means the headline “balance” on your statement is misleading. What actually matters is how much you will repay before it is written off, which for many people is not the full balance.
Under Plan 2 (broadly, started uni between 2012 and 2023), you repay 9% of whatever you earn above roughly £27,295 per year, and the balance is written off after 30 years. Under Plan 5 (started from 2023), you repay 9% above roughly £25,000 and the write-off is 40 years. The exact thresholds change each year with inflation, so check the current numbers on gov.uk.
Interest accrues while you are studying and afterwards, and the rate varies. The interest can look scary — sometimes the balance grows faster than you repay it. This scares people into trying to pay it off early. For most graduates, paying off a student loan early is a bad idea, because you may be paying off a balance that would otherwise have been written off. You are essentially giving HMRC money you did not owe.
The rough rule is: if you are a very high earner (you will definitely clear the whole balance before write-off), overpaying early can make sense. If you are a normal earner, treat it as a graduate tax, do not try to pay it off, and put any spare money into an ISA or pension instead, where it will grow for you.
The credit-score question: a UK student loan does not appear on your credit file and does not directly affect your ability to get a mortgage. Lenders do look at your take-home pay though, and your student loan reduces take-home pay, so it shows up indirectly.
What you can actually do this week
- Check which Plan you are on (Plan 1, 2, 4, or 5) — it changes the maths completely. Your Student Loans Company account will tell you.
- Log in to your SLC account once a year to check the balance and repayments applied. That is enough. Do not check it monthly.
- If you are tempted to make a voluntary repayment, run the numbers on the MoneySavingExpert student loan calculator first. For most people it will say: do not.